4.6/51670+ reviewsIn business, not all transactions involve cash. Bartering—the exchange of property or services—is a common practice, especially among small businesses. A web designer might build a website for an accountant in exchange for tax preparation services, or a restaurant might provide meals for a marketing firm in exchange for an advertising campaign.
A common misconception is that these non-cash transactions have no tax implications. However, the IRS is clear: the fair market value of property or services received through barter is considered taxable income. This guide explains how to correctly value, categorize, and deduct barter expenses to ensure your business stays compliant.
The most important concept for accountants and business owners to understand is that every barter arrangement creates both income and an expense.
The expense is categorized based on the service or product you received. For instance, if you are a graphic designer and you receive legal services in exchange for designing a logo, you have income equal to the FMV of the legal services, and a deductible expense categorized as "Legal and Professional Fees."
Accurately valuing and classifying barter transactions is crucial for maintaining accurate financial records and ensuring proper tax reporting.
The value of a barter transaction is based on the Fair Market Value of the property or services received. FMV is the price at which property would change hands between a willing buyer and a willing seller. If you and the other party agree on the value of the services beforehand, the IRS will generally accept that value unless it can be proven otherwise.
If your business joins a formal barter exchange or club that uses "credit units" for transactions, the value of those credit units is taxable income. You must include the dollar value of credit units in your income for the tax year in which they are credited to your account.
A crucial rule from IRS Publication 535 is that you cannot deduct the cost of your own labor. If you are a consultant and you provide 10 hours of your services in a barter deal, you cannot deduct the value of those 10 hours as a business expense. You can only deduct your actual out-of-pocket costs related to providing the service.
If you pay for a business expense by giving merchandise from your inventory, your deductible cost is limited to what that merchandise costs you. If the cost of that inventory is already included in your Cost of Goods Sold (COGS), you cannot deduct it again as a separate business expense.
The following examples from IRS Publication 334 illustrate how to treat barter transactions:
An accountant provides services to a house painter's business. In return, the painter paints the accountant's office. Both must include the fair market value of the services they received in their gross receipts. The accountant has a "Repairs and Maintenance" expense, while the painter has a "Legal and Professional Fees" expense.
A self-employed lawyer provides legal services to a corporation and receives shares of stock as compensation. The lawyer must include the fair market value of the stock in income on Schedule C.
An artist creates a painting to pay for the rent-free use of their business studio. The artist must include the apartment's fair rental value in their business income. The landlord, in turn, must report the fair market value of the artwork as rental income.
Failing to report barter transactions properly can lead to tax complications.
You must report the fair market value of the goods or services you receive as business income on Schedule C (Form 1040). The corresponding business expense is then deducted in its proper category on the same schedule (for example, "Repairs and Maintenance," "Legal and professional services," etc.).
If you are involved in bartering, you may be required to file an information return to the IRS. Depending on the nature of the transaction, you may need to file:
You must also furnish a copy of the form to the other party in the transaction.
Your business records must document all barter transactions. You need supporting documents that show the amounts and sources of your barter income, as well as the details of your related expenses. Your records should include:
While barter expenses are non-cash, documenting them is just as critical as tracking credit card or check payments. Fyle’s platform can be adapted to serve as the system of record for these complex transactions, ensuring you have a clear audit trail.
You can easily create a zero-dollar or memo expense within Fyle to represent the barter transaction. Then, you can attach all crucial supporting documents—such as the barter agreement, invoices showing the agreed-upon Fair Market Value, and any related correspondence—directly to the expense entry. This creates a centralized, digital repository for every non-cash transaction, ensuring no detail is lost.
Furthermore, these documented transactions can be categorized (e.g., "Legal Fees - Barter") and synced directly to your accounting software, including QuickBooks, Sage Intacct, NetSuite, and Xero. This provides your accountant with a complete, well-documented record, allowing them to make the necessary journal entries to recognize both the barter income and the corresponding non-cash expense, keeping your books accurate and compliant.
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